Baron Partners Fund | Q3 2025

Baron Partners Fund® (the Fund) had strong quarterly results on both an absolute and relative basis. Over the prior quarter, the Fund appreciated 13.17% (Institutional Shares), its second consecutive double-digit gain. This result exceeded both its benchmark, the Russell Midcap Growth Index (the Index), and the broader Russell 3000 Index (the Market Index). Those two indexes rose 2.78% and 8.18%, respectively. The Fund also outperformed peers in the Morningstar Large Growth Category, which were up 7.59%.*

Over the prior 12 months, the Fund has returned 33.23%. That performance again compares very favorably to the Index and the Market Index’s returns of 22.02% and 17.41%, respectively.

While the Fund performed well on an absolute basis over the prior three years, it has trailed its benchmarks. That period encompassed a transitional time in the global financial markets. In 2022, investors were uncertain about the strain inflation and interest rates would have on the economy. The market rotated away from the COVID era favored growth investments and towards more value oriented steadier businesses. And again in 2025, a changed political landscape has created another period of investor uncertainty. The Fund’s low turnover makes it temporarily susceptible to these sudden changes in market sentiment. The Fund’s sizable gains in calendar years 2023 and 2024 have been bookended by declines in 2022 and lagging returns so far in 2025. Over the prior three years, the Fund returned 17.03% annualized, while the Index returned 22.85%.

But while the Fund has trailed the Index and Market Index over the prior 3-year period, it is ranked in the top percentile of its Morningstar category over each the prior 10-year, 15-year, and since conversion periods. The Fund is also highly ranked over the last twelve months (8^th percentile) and trailing 5-year period (19^th percentile). The rapid and short-lived market shifts that caused recent underperformance have had much less impact on the Fund’s long-term absolute and relative returns. Since its conversion to a mutual fund, the Fund’s annual return of 17.24% compared to the Index’s return of 12.03%. We are very proud of these achievements and long-term investors have been rewarded.

Similar to last quarter, Tesla, Inc. was both the largest position in the Fund and most impactful contributor to performance. The investment’s total return was 40.2%. There has been improved demand for legacy product, the business model is on the cusp of transforming, and future product lines provide significant potential. We appreciate the company’s ability to reaccelerate vehicle sales through customer segmentation. Lower priced vehicles attained through content reductions and manufacturing efficiencies in the U.S. should broaden accessibility. A longer Model Y version in China we believe should improve demand in that key market. While the core vehicle business is positioned for substantial growth, we are most excited about the company’s rapid and meaningful improvements in full-service driving. The company is rapidly transitioning into a high margin recurring revenue software business from its legacy hardware sales. We expect the Robotaxi service to expand into various and diverse highly populated markets throughout 2026. A purpose-built Cybercab should bring improved economics. And the company still has the ability to become significantly larger as it scales its energy business and develops the humanoid robot, Optimus.

A lot of press reports have been critical of the new pay package for Tesla founder and CEO Elon Musk. While others focus on the eye-catching (stock) compensation figure, we are much more focused on the financial, operational, and valuation attributes the company needs to achieve in order to earn the various tranches. These aspirational goals provide clear incentives and executive focus that we believe are aligned with long-term shareholders’ best interests.

While Tesla had the greatest impact on returns, there were a handful of other double-digit gainers across various sectors and growth categories. The commonality is that our investment thesis is being realized. Core growth veterinary diagnostic company IDEXX Laboratories, Inc. returned 19.1%. Newly developed instruments analyzing pet cancer are gaining great adoption. These instruments also provide the sales team an ability to cross sell existing systems into the market. Another instrument is expected to launch in the coming years and should provide another leg of growth. Real asset and Las Vegas locals gaming operator Red Rock Resorts, Inc. has delivered impressive results at its latest new property. This success provided confidence to accelerate that property’s expansion and begin other new developments.

On the contrary, declines in the portfolio were generally related to the perceived threat posed by AI. Soft results for both Gartner, Inc. and FactSet Research Systems Inc. have given credence to investor pessimists that these businesses are susceptible to AI displacement. We do not believe this is true. Both companies have years of proprietary data that should be more effective for AI tools rather than threatened by it. We remain confident in their ability to grow these businesses and believe AI will become a benefit to add services for their clients.

* Individual weights may not sum to displayed total due to rounding.
** Represents the blended return of all share classes of the Fund.
Sources: Baron Capital, FTSE Russell, and FactSet PA.

Tesla, Inc. designs, manufactures, and sells fully electric vehicles, related software and components, solar products, and energy storage solutions. Shares rose during the quarter due to three key catalysts. First, Tesla’s core automotive business is showing renewed strength, with expectations for rising third-quarter delivery volumes across major markets following an enthusiastic consumer response to a new Model Y variant in China. Second, investor confidence in the company’s long-term vision and in Elon Musk’s leadership was reinforced by a newly proposed CEO compensation package and nearly $1 billion in personal share purchases by Musk. Finally, Tesla’s AI initiatives continue to advance rapidly, highlighted by the Austin robotaxi network’s expansion from 20 to over 170 square miles since its June 2025 launch and plans for rollouts to additional cities. The upcoming Full Self-Driving Version 14 release is also expected to deliver a major leap in capability for the company’s consumer-owned fleet, while humanoid robot production is anticipated next year as Tesla finalizes its latest Optimus design.

Space Exploration Technologies Corp. (SpaceX) is a high-profile private company founded by Elon Musk. The company’s primary focus is on developing and launching advanced rockets, satellites, and spacecrafts, with the ambitious long-term goal of making life multi-planetary. SpaceX is generating significant value with the rapid expansion of its Starlink broadband service. The company is successfully deploying a vast constellation of Starlink satellites in Earth’s orbit, reporting substantial growth in active users, and regularly deploying new and more efficient hardware technology. Furthermore, SpaceX has established itself as a leading launch provider by offering highly reliable and cost-effective launches, leveraging the company’s reusable launch technology. SpaceX capabilities extend to strategic services such as human spaceflight missions. Moreover, SpaceX is making tremendous progress on its newest rocket, Starship, which is the largest, most powerful rocket ever flown. This next-generation vehicle represents a significant leap forward in reusability and space exploration capabilities. We value SpaceX using prices of recent stock transactions.

Veterinary diagnostics leader IDEXX Laboratories, Inc. contributed to performance after reporting better-than-expected financial results. Foot traffic to veterinary clinics in the U.S. remains under pressure, which has continued to hamper aggregate revenue growth. Even so, IDEXX’s excellent execution has enabled the company to maintain strong performance. We believe IDEXX’s competitive trends are outstanding, and we expect new proprietary innovations and field sales force expansion to be meaningful contributors to growth this year. We see increasing evidence that long-term secular trends around pet ownership and pet care spending have structurally accelerated, which should support IDEXX’s long-term growth rate.

FactSet Research Systems Inc. is a leading provider of investment management tools. Shares fell during the quarter due to a combination of industry-wide concerns about AI, uncertainty surrounding the ongoing CEO transition (which prompted a more conservative preliminary fiscal 2026 outlook), and cautious commentary from several financial data and software peers. The company nevertheless reported solid fiscal fourth quarter 2025 earnings results, its best quarter ever for new sales, and discussed at length how AI is benefiting the business. We retain long-term conviction in FactSet given its large addressable market, strong execution across both new product development and financial results, and robust free cash flow generation.

Gartner, Inc., a provider of syndicated research, detracted from performance following disappointing quarterly earnings. Contract value growth, a leading indicator of future revenue, decelerated by approximately 2%. We attribute most of the slowdown to ongoing cost cutting in the U.S. public sector, which represents about 5% of revenue, as well as more challenging business conditions in industries dependent on public-sector funding. In addition, companies with meaningful exposure to tariffs appear to be reducing costs, resulting in longer sales cycles and slightly higher client attrition. While the market expressed concern about the impact of AI on Gartner’s insights business, we see no evidence that this is negatively impacting its value proposition. The company continues to benefit from a vast and expanding set of proprietary data generated through hundreds of thousands of interactions with buyers, sellers, and technology consumers. Gartner bought back approximately $800 million worth of stock in July and August and authorized an additional $1 billion in September, and we expect the company to continue repurchasing shares aggressively to capitalize on the discounted valuation.

StubHub Holdings, Inc., the leading marketplace for the resale of live event tickets, detracted from performance following its September IPO. The company has been investing heavily to expand market share and develop capabilities to sell tickets directly on behalf of sports teams. Near-term results were also affected by challenging annual revenue comparisons after the outsized success of Taylor Swift tour ticket sales last year. Despite these temporary headwinds, we remain optimistic that StubHub’s growth and profitability will accelerate meaningfully.

We seek to invest in businesses we believe can double in value within five or six years. We invest for the long term in a focused portfolio of appropriately capitalized, well-managed growth businesses at attractive prices across market capitalizations. We attempt to create a portfolio of no more than 30 securities diversified by GICS sectors, but with the top 10 positions representing a significant portion of net assets. These businesses are identified by our analysts and portfolio managers using our proprietary research. We think these well-managed businesses have sustainable competitive advantages and strong, long-term growth opportunities. We use leverage to enhance returns, which increases the Fund’s volatility.

As of September 30, 2025, we held 22 investments. The median market capitalization of these growth companies was $22.7 billion. The top 10 positions represented 88.7% of total investments. Leverage was 6.5%.

In the quarter, we sold 16% of our position in Tesla. As explained previously in this letter, we are extraordinarily confident in the company’s prospects and ability to become a significantly more valuable business. The Fund completed its purchase of Tesla shares in 2016 with an ending portfolio weight of 9.6% of total investments. Its current average cost in the Fund is only $14.86 per share. Due to significant appreciation in the stock, the position increased to 30.5% of the Fund’s total investments at the start of the recent quarter. Despite offsetting some of the volatility caused by the position’s weight with more stable and uncorrelated investments, Tesla’s stock movements caused increased variability in the entire portfolio. We entered into agreements with large investment banks to dispose of a portion of the holdings through a redemption in-kind because, we believe, it would have minimal impact on the share price and no transaction costs. Tesla remains the Fund’s top holding, by far. The disposition was a portfolio construction decision rather than reduced confidence in the business.

The long-term absolute and relative performance of the Fund has been very good. The Fund has returned 17.24% annualized since conversion to a mutual fund on April 30, 2003, exceeding the Index by 5.21% per year.

The Fund’s performance has also meaningfully exceeded the Index over the prior 5-, 10-, 15-, and 20-year periods.

However, the Fund has not exceeded its benchmark over every period. The distinct composition of the portfolio could result in periods of underperformance. The current year-to-date results are one of those periods. And while we are disappointed with this distinct period, we are not alarmed by the relative underperformance. The low turnover strategy implemented by the Fund has previously resulted in similar stretches. And we have not only endured analogous periods throughout the Fund’s history but have also typically emerged with strong absolute and relative performance in subsequent years. Although we have no guarantee of continued success, we believe this trend will continue.

We continue to believe the current year-to-date results should not be viewed in isolation and remind investors how the portfolio has performed over the course of a full cycle. Year-to-date results in 2025 follow a period of a surprise and drastic change in the U.S. political landscape. The business and investor euphoria experienced because of the Presidential election at the end of 2024 was met with the realities of policies enacted (and in some cases, enacted, paused, and/or withdrawn) at the start of 2025. Investors had believed that President Trump would usher in a pro-business era of less regulatory burdens, falling interest rates, and lower taxes. However, these same investors remain concerned about tariffs hindering international trade, inflation harming discretionary spending, and federal spending cuts and the ongoing government shutdown impacting economic growth. It has been a whipsaw of forecasts.

We did not attempt to predict the 2024 election outcome, nor investor reaction to it. And we likewise are not attempting to predict current policy. We believe that our investments should achieve their goals regardless of political outcomes. Reduced regulatory burdens should enable our disruptive growth businesses to meet their objectives more quickly. And we find that more challenging economic environments tend to favor our core growth quality, competitively advantaged businesses, which are well represented in the Fund. These businesses should face less competition from new entrants in such economies. And the executive teams should position their business to thrive. The Fund’s portfolio turnover remained low throughout this period. A transitional period is often volatile, and that has once again been the case. But the Fund is weathering this entire period very well. Since the U.S. election on November 5, 2024 when the macroeconomic and political environment shifted, the Fund has gained 39.02%, while the Index has gained only 17.19% through the end of the quarter.

While we present the Fund’s absolute and relative returns over the SEC mandated periods, we believe it is also important to discuss how the Fund performs over the course of different longer market environments. Therefore, in addition to viewing the Fund’s returns over these various SEC mandated trailing annual periods, we believe it is helpful to understand how the Fund has performed over economic cycles.

The Fund has appreciated considerably in good times…

There have been two distinct periods over the life of the Fund with significant economic growth. The nearly eight-year period from the Fund’s inception through the Internet Bubble (1/31/1992 to 12/31/1999) and the more recent 11-year period Post-Great Recession to the start of the COVID Pandemic (12/31/2008 to 12/31/2019). During both periods, the Index had strong returns; however, the Fund’s returns were even better. The Fund’s annualized return during the most recent robust economic period was 17.44% compared to the Index’s 16.84%. The Russell 3000 Index had an annual return of 14.70% during that time.

Performance data quoted represents past performance. Past performance is no guarantee of future results. The indexes are unmanaged. Index performance is not Fund performance. Investors cannot invest directly in an index.

The Fund has retained value in challenging times…

We believe what especially sets the Fund apart from other growth funds is its historic ability to outperform in more challenging economic periods. The nine-year period from the Internet Bubble collapse through the Great Recession (12/31/1999 to 12/31/2008) saw lower returns for the Fund. It had an annualized return of 1.54%. However, the Index declined substantially. A $10,000 hypothetical investment in the Fund at the start of this period would have been worth $11,479 after those nine years. A $10,000 hypothetical investment in a fund designed to track the Index would be worth only $6,488, more than a 35% cumulative decline. The Fund preserved (and slightly grew) capital during this difficult economic time because its investments in a diverse set of high-quality growth businesses could weather the environment and enhance their competitive positioning.

The COVID-19 (COVID) pandemic and its lingering macroeconomic issues have caused excessive market volatility. Over the course of three years, there were two sizable market corrections during which most major indexes decreased more than 25%. But the Fund has performed admirably in both protecting and growing clients’ capital. During the COVID-Pandemic and its aftermath (12/31/2019 to 12/31/2022), the Fund had an annualized return of 23.65%. The Index’s annualized return was significantly lower at only 3.85%.

Performance data quoted represents past performance. Past performance is no guarantee of future results. The indexes are unmanaged. Index performance is not Fund performance. Investors cannot invest directly in an index.

The Fund is off to a good start in the current period…

Since the COVID pandemic and subsequent market downturn ended, the Fund has performed well on an absolute and relative basis. Since December 31, 2022, the Fund has returned 28.72% annualized compared to the Index’s return of 22.16%. While this is only a partial cycle, we believe we are off to a good start.

Over the longer term, this combination of exceeding the Index in various market environments has been rewarding for clients. A $10,000 hypothetical investment at the inception of the Fund on January 31, 1992, would have been worth $1,264,550 as of September 30, 2025. That same $10,000 hypothetical investment in a fund designed to track the Index would now be worth $281,342, only approximately 22% of what it would have been worth if invested in the Fund.

Thank you for joining us as fellow shareholders in Baron Partners Fund. We continue to work hard to justify your confidence and trust in our stewardship of your hard-earned savings. We remain dedicated to giving you the information we would want if our roles were reversed. We hope this letter enables you to make an informed decision about whether this Fund remains an appropriate investment.